Ladbrokes May Face Leveraged Buyout


Dormant account
May 7, 2004
The perceived risk of holding Ladbrokes Plc debt rose after a report that the world's biggest publicly traded bookmaker may be taken over in a leveraged buyout, according to traders betting on the creditworthiness of companies in the credit-default swap market.

Contracts based on 10 million euros ($13 million) of Ladbrokes debt rose to 132,000 euros from 127,000 euros, according to prices from Deutsche Bank AG. Credit-default swaps are financial instruments based on corporate bonds and loans that are used to speculate on an increase or decrease in indebtedness.

Shareholders of Harrow, England-based Ladbrokes may be tempted to accept an offer from buyout firms, the Independent said Nov. 25, citing traders. Ladbrokes turned down a 3.7 billion-pound ($7.17 billion) offer from CVC Capital Partners Ltd. earlier this year. The company's market value has since fallen to 2.7 billion pounds after earnings were hurt by winning bets on soccer matches and horse races.

``The threat of an LBO could continue,'' said Sonia Van Dorp, a credit analyst at Societe Generale SA in Paris. ``Ladbrokes' equity value has barely moved year to date, partly because there has not been any acquisition this year, partly because operating performance has been disappointing.''

A rise in the cost of credit-default swap contracts based on Ladbroke's 800 million pounds of bonds indicates a deterioration in credit quality.

Investors who buy the securities, sold by financial firms such as New York-based JPMorgan Chase & Co. and Frankfurt-based Deutsche Bank, are paid 10 million euros in exchange for the notes should the company fail to adhere to debt agreements during the next five years.

Bid Rejected

London-based BC Partners Ltd. and Blackstone Group LP in New York, the world's biggest buyout fund, may have shown an interest in buying the company earlier this year, the Independent said, citing traders. The Financial Times reported in February that a bid from CVC Capital was rejected.

Leveraged buyout firms raise investor concerns because they buy companies using a little of their own money and typically borrow to pay about two-thirds of the purchase price. The result is that bond prices and credit ratings fall and spreads widen.

Hilton Group Plc, the former owner of Ladbrokes, said in February that offers it had received for the business didn't recognize its ``long-term strategic value,'' without naming the suitors.

The report this weekend of a possible buyout comes after an unusually high number of favorites won U.K. soccer matches and horse races in October. Ladbrokes shares fell 4.6 percent on Nov. 16, the steepest drop in three and a half years.

Ciaran O'Brien, spokesman for Ladbrokes, declined to comment.

International Expansion

Ladbrokes is expanding internationally and may buy Gibraltar-based 888 Holdings Plc, the U.K.'s second-biggest Web gambling company. A large acquisition could ease concerns that Ladbrokes may become an LBO target, Societe Generale's Van Dorp said.

Ladbrokes is rated Ba2 by Moody's Investors Service, two levels below investment grade, and an equivalent BB at Standard & Poor's. The outlook on both ratings is stable, indicating a change isn't likely any time soon.

``Although the outlooks on Ladbrokes ratings remain stable at both S&P and Moody's, a large acquisition or a leveraged buyout could impact current ratings,'' Van Dorp said.

Credit-default swaps are the fastest growing market for derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

The perception of European credit quality as measured by the iTraxx Crossover Index deteriorated today. A credit-default swap based on a 10 million-euro contract on the index, which includes 45 companies with investment-grade and non-investment grade ratings, rose to 242,500 euros, or 1 percent, from 240,000 euros Friday, according to data compiled by JPMorgan. The index moves an average of about 1.5 percent a day.

The long term strategy of Ladbrokes ensures it's value is going to rise. They have gone into a joint venture with the Chinese Govt, allowing them to open up betting shops in China. Plus they have entered into a similar agreement in Italy. No doubt this will allow them at some point to offer their online products to both countries.

From what I have heard they also had plans to enter the American market on 1st October, but this was obviously shelved upon Carruthers arrest.

I would imagine, the board of directors of Ladbrokes PLC will fight any planned takeover. Within a year I can see Ladbrokes who are the largest high street bookmaker becoming the largest online egaming company as well.

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